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A 'healthy bean sprout'

Commentary: Increase in corporate buyback programs is a bullish omen

ANNANDALE, Va. (MarketWatch) -- Some green shoots are more significant than others.

And one of the most noteworthy would be an increase in corporate share repurchase activity.

Unfortunately, last year provided precious little evidence that such a green shoot might be taking root any time soon: The total dollar value of corporate repurchase programs announced in 2009 was just $108 billion, down from $571 billion in 2007, just two years previously. (Data are courtesy of Thomson Reuters).

With early precincts reporting, however, this year is shaping up to be a different story.

It may not be a full-fledged green shoot yet, but -- in the words of David Ikenberry, a finance professor at the University of Illinois at Urbana-Champaign, who has extensively studied corporate repurchases -- recent activity on the buyback front amounts to "a very healthy bean sprout."

Just yesterday, in fact, Philip Morris became the latest in a series of companies that, since the beginning of this still-young year, have announced new corporate buyback programs. In Philip Morris' case, the newly-announced program involved the purchase of up to $12 billion of the company's stock over the three years beginning this coming May. (Read news story about Philip Morris' buyback announcement.)

Philip Morris' news brings the year-to-date total of newly announced buyback programs to more than $22 billion. If new buyback programs are announced at the same pace for the rest of this year, the total for all of 2010 could be nearly double what was recorded for all of 2009.

The reason that increased corporate buyback activity is such good news, according to Ikenberry: It indicates that corporations are increasingly confident that a recurrence of the 2008-2009 credit crisis is not imminent--or that if one were nevertheless to occur, they have more than enough cash to survive it.

Ikenberry notes that the increase in share repurchase programs is not simply a function of corporations having lots of cash. After all, they had lots of cash one year ago as well, but still very few of them chose to announce new repurchase programs. That's because, he said, they couldn't at that time count on having access to the credit markets. They therefore needed to hoard cash.

By the way, buybacks are not only a bullish omen for the economy and market as a whole. They are also bullish for the individual companies that announce a buyback program.

Consider the performance of the Buyback Letter, edited by David Friend, an advisory service that recommends stocks based on buyback activity. Since the beginning of 1997, which is when the Hulbert Financial Digest began tracking this service, it has produced a 10.6% annualized gain, compared to 5.0% for the overall stock market (as measured by the Wilshire 5000 index). Among all the services the Hulbert Financial Digest has tracked since 1997, the Buyback Letter is in 3rd place.

As Fried put it in a recent communication to clients: "We see increased repurchasing as a sign that corporate America thinks shares are currently undervalued, and future prospects look better."

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